Managerial Economics

Module 2 – Economic Optimization

Take Home Quiz

Instructions:
 This assessment will be done in pairs.
 Write all your solutions and answers on yellow pad and box final answers.
 This will be submitted in the following meeting.

Problem #1
Suppose the microchip producer discussed in this chapter faces demand and cost equations given
by Q = 8.5 - .05P and C = 100 + 38Q + Q^2. Determine the following:
a. Breakeven Q and P
b. Revenue Maximizing Q, P and R
c. Profit Maximizing Q, P and Profit

Problem #2
In November 2007, Amazon introduced the Kindle, the first successful reading device for
electronic books. In 2009, the company dropped the Kindle’s price to $259 and in mid-2010 to
$189. Financial analysts estimated annual sales to be approximately 1 million units at the $259
price. Bezos reported that the price cut was successful in igniting Kindle sales, claiming that the
price cut to $189 had tripled the rate of sales (implying annual sales of 3 million units at this
lower price). Furthermore, it was estimated that Amazon earned a contribution margin of $4 on
each e-book and that each Kindle sold generated the equivalent of 25 e-book sales over the
Kindle’s life. In
other words, besides the marginal revenue Amazon earned for each Kindle sold,
it gained an additional MR (per Kindle) of $100 due to new e-book sales.

a. Given the inverse demand curve of P = $294 – 35Q, the marginal cost of producing the
Kindle is estimated at $126 per unit. Apply the MR = MC rule to find the output and
price that maximize Kindle profits.
b. Considering that each Kindle sold generates $100 in e-book profits, determine Amazon’s
optimal quantity and price with respect to the total profit generated by Kindle and e-book
sales. What is the implication for Amazon’s pricing strategy?

Problem #3
A television station is considering the sale of promotional videos. It can have videos produced by
one of two suppliers. Supplier A will charge the station a set-up fee of $1,200 plus $2 for each
DVD; supplier B has no set-up fee and will charge $4 per DVD. The station estimates its demand
for the DVDs to be given by Q = 1,600 -200P, where P is the price in dollars and Q is the number
of DVDs. (The price equation is P=8 - Q/200.)
Managerial Economics

a) Suppose the station plans to give away the videos. How many DVDs should it order?
From which supplier?
b) Suppose instead that the station seeks to maximize its profit from sales of the DVDs.
What price should it charge? How many DVDs should it order from which supplier?

Problem #4
The college and graduate-school textbook market is one of the most profitable segments for book
publishers. A best-selling accounting text—published by Old School Inc (OS)—has a demand
curve: P = 150 -Q, where Q denotes yearly sales (in thousands) of books. (In other words, Q = 20
means 20 thousand books.) The cost of producing, handling, and shipping each additional book
is about $40, and the publisher pays a
$10 per book royalty to the author. Finally, the publisher’s overall marketing and promotion
spending (estimated at the start of the year) accounts for an average cost of about $10 per book.

a. Determine OS’s profit-maximizing output and price for the accounting text.
b. A rival publisher has raised the price of its best-selling accounting text by $15. One
option is to exactly match this price hike and so exactly preserve your level of sales. Do
you endorse this price increase? (Explain briefly why or why not.)